Why was I de-banked? We are not in a position to provide any further information - is not a valid legal reason

In brief - The recent case of Human Appeal International Australia v Beyond Bank examines the circumstances of a wrongful termination of banking services. 

De-banking - legal parameters imposed on a bank's right to terminate banking services 

The recent case of Human Appeal International Australia v Beyond Bank Australia Ltd (No 2) [2023] NSWSC 1161, examines and provides judicial guidance on the circumstances and conduct of a bank which constitutes wrongful termination of banking services in the context of specific account terms and conditions adopted by Beyond Bank (Bank), and by implication what conduct may constitute lawful de-banking. 

What is de-banking?

De-banking occurs when a bank declines to provide banking services or withdraws banking services from an existing customer or class of customer.

The Australian Government's response to de-banking suggests that de-banking may be driven by several inter-related causes, including Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) laws, sanctions compliance, profitability, and reputational risk considerations.

The de-banking case

The facts of this case are typical and involved a bank (Beyond Bank) exercising a discretionary power, under its banking contract with the customer (Human Appeal), to close a customer’s accounts, even though those accounts were in credit and were being operated in accordance with the Bank’s trading terms.

Beyond Bank purported to unilaterally close Human Appeal’s banking facilities without providing a valid reason but relied on account terms and conditions to terminate them.

This article explains the critical factual elements which resulted in Beyond Bank's de-banking decision being invalid at law.

The Bank

Beyond Bank (Bank) is a mutual bank owned by members. 

Therefore, Human Appeal (Customer) was both an account owner and a member of the Bank entitling it to hold an account together with member rights.

The Customer

The Customer was a company limited by guarantee which:

• operates as a charity registered with the Australian Charities and Not-for-profits Commission; and

• was established more than 30 years ago with particular support from the Muslim community in Australia.

The Customer's account with the Bank received approximately $200,000 worth of donations from roughly 4,000 people every fortnight by direct debit. Other fund raising included campaign/fundraising drives (online, in person, or by telephone), project-based fundraising (involving a monthly commitment, by direct debit such as a monthly gift to sponsor an orphan), and cash donations to offices or donation checkpoints.

The Banking Services

Human Appeal established banking facilities with Beyond Bank in March 2021.

The Customer held:

• a 'Community Account' - an ordinary transactional account into which funds could be deposited and withdrawn;

• a 'Visa Debit Account' through which withdrawals be made by way of Visa-branded debit cards issued to the customer; and 

• a single member share in the Bank which covered both accounts.

De-banking conduct

In mid-August 2021, the Bank notified the Customer, purportedly in reliance on the terms and conditions that apply to the accounts, that it was closing the accounts.

The termination of the Customer's banking facilities was effected by notice in the form of an email sent by the bank on 11 August 2021:

"A recent review was conducted and as a result the bank has concluded that your banking business is not suited to Beyond Bank and therefore, we will exercise our right to close all of your banking facilities under membership XXXXXXXX, with effect from close of business 20/8/2021.

I am not in a position to provide any further information as to why your banking business is not suited to Beyond Bank."

At the time, the balance of the Customer's Community Account was around $6.1 million in credit, and its Visa Debit Account was around $13,600 in credit.

The Bank denied a subsequent request from the Customer to extend its provision of services until February 2022 to ease the Customer's change of financial institution, at which point the Customer commenced legal action.

Legal Action 

The Customer sought:

• initial injunctive relief to require the Bank to continue to provide banking facilities and associated services - which was subsequently granted by consent until the further order of the Court;

• (first claim) a declaration that the purported termination of the banking facilities was invalid; and

• (second claim) an order compelling the Bank to vary its terms and conditions so as to require the existence of reasonable grounds, and proper notice of termination with justification or reasons provided.

The arguments supporting the Customer's two primary contentions can be summarised as follows:

Claim 1 - Duties to Customer

The Bank's decision to terminate the Customer's banking facilities was improper or invalid as the Bank was only entitled to do so if it was acting in good faith and reasonably. This was founded on an assertion that under the Bank’s contractual obligations to its Customer that a duty of cooperation and good faith was generally implied in commercial contracts.

That is, the Bank had no entitlement to terminate the account except on reasonable grounds, and since on the evidence no reasonable grounds existed, the purported termination of the banking facilities was invalid.

It is also interesting to note that the Customer's legal counsel submitted that the relationship of banker and customer, while not fiduciary, was of itself a relationship of 'good faith' however this was not addressed or analysed further by the Court.

Claim 2 - Banks trading terms and incorporation of Code of Practice

The trading terms used by the Bank referred to the Code of Practice adopted by the Customer Owned Banking Association.

The terms and conditions were expressed to incorporate and to be subject to, the terms of the Code, which included an obligation to ensure the Bank's terms and conditions fairly balanced the interests of the Bank and its customers. Thus, it was contended that the Bank's termination of the banking contract without justification or reason did not fairly balance such interests, and the Code could be enforced against the Bank to vary its terms and conditions accordingly.

Bank's response 

In the first instance, the Bank relied on a product guide that stated:

"Section 25 — Closing Accounts and Memberships;

We may, at any time, close any of your Accounts by giving you 20 days written notice. The notice does not have to specify the reasons for the closure."

However, subsequently, in Court, the Bank conceded that the terms of the Code were imported into its account terms and conditions, and therefore the Bank was required to have a legitimate commercial reason to close the Customer's accounts.

In this regard, the Bank asserted that the commercial reason for seeking to terminate the Customer's banking facilities was due to the volume and complexity associated with reviewing the transactions associated with the Customer's account and the increasing burden on the Bank's AML/CTF team.

Further, the Bank asserted that it was prevented from further disclosure of those reasons to the Customer and ultimately the substance of those reasons to the Court because of confidentiality restrictions prohibiting it under the AML/CTF Act, namely due to the 'tipping off' prohibitions contained in section 123 of the AML/CTF Act.

Court decision

The Court did not accept either of the following matters:

• the Bank's reasons for termination, and formed a view that in the circumstances the Bank could have communicated its concerns to its Customer; and

• on the evidence, that the cost of monitoring the Bank accounts was the reason for the decision to terminate.

The judgment focussed on specific account and trading terms and conditions adopted by the Bank. In this regard the Court:

• observed that the existence of an obligation to exercise contractual powers in good faith (and, it is sometimes added, reasonably) is well recognised;

• however did not go so far as specifically addressing whether a bank's right to terminate is always subject to the implied obligation of good faith or reasonableness;

• held that the Code of Practice was expressly incorporated into the Bank’s terms and conditions, which guide the manner in which the Bank is to act. Although the Code does not use the terms 'good faith' or 'reasonableness', it uses similar terms. Thus, there was room to argue that there is a contractual obligation of good faith and reasonableness which is express (or at least which arises from the express terms of the contract rather than by way of stand-alone implication); and

• accepted the Bank submission that the fair balancing of interests must take account of the Bank’s legal obligations, including its secrecy obligations under the Commonwealth Act, that is, any obligation to give reasons must be limited to the reasons the Bank may lawfully disclose. However, in the current circumstances, this was not an obstacle to giving at least some explanation if the Bank’s decision had been based on the administrative burden of complying with the AML/ CTF Act.

Summary 

In the circumstances of the Case, the Bank was obliged to have reasonable evidence to support its determination that it had a valid commercial reason to terminate the Customer's banking facilities and to disclose that reason to its Customer. 

That is, the Bank was only entitled to terminate Human Appeal’s banking facilities if it had “a valid commercial reason” for doing so.

The case suggests that to validly de-bank a customer a bank does not have a unilateral right to terminate its relationship with a customer pursuant to an express termination provision in its trading or account terms as other factors intervene such as:

• a decision to de-bank must have a commercial basis;

• the terms and conditions may be expressly affected by the relevant Code of Conduct; 

• the Bank must “act honestly” and “fairly and reasonably” towards its customer;

• a bank is obliged to give reasons for its decision.

On the flip side, it follows that if a bank satisfies these criteria then the termination of banking facilities may be valid.

In our next article, we will examine the case in the context of a bank's legal duties to a customer and other factors which may characterise whether a bank's decision to de-bank a customer is legally determined as lawful or unlawful.